M&A, Area Play Driving Resource Stocks

The US unemployment numbers that came out on the day before last summer long weekend were less bad than expected. Or so the markets indicated until ISM manufacturing data in the afternoon cooled enthusiasm some. It had been good Australian and Chinese manufacturing data that turned market sentiment earlier in the week. Arguably the most interesting bit of news had been 100 km long traffic halts in China of coal trucks trying to make deliveries to power plants. More infrastructure gains are obviously needed to keep China growing.

Augusts’ chagrin was about some sovereign debt that was excluded from the Euro-zone stress tests, but that has quickly become a Continental issue. To borrow one weather related phrase “if you don’t like the market we’re in just wait 10 minutes”. Volatility in the equities space continues to be balanced by incremental gains for bonds, and uncertainty from everyone else about how to focus. However, recent relative strength metals underscore where wealth is being stored.

It is still impossible to get a proper gauge of how the direction the market’s psychology is going to turn. That is usually done by looking at leaders for a cue. But, who leads when capital hides under low yield government paper fearing a resumed Debt Crunch? Being wrong has become less acceptable than being decisive. At least in the West. In China and other BRIC domains even the lower paid cadres are increasingly proclaiming their views of what is right. Perhaps that what’s being reflected by our favorite neutral leader these days?

The three-city copper warehouse stocks continue to decline while the red metal’s price shifts higher against the greenback. That is a normal pattern if you’re looking for signals of continued growth. There has been somewhat less mine supply than expected which aids the price gains, but copper’s price rarely gains unless the “invisible hand’s” signal is a thumbs up from the consumption side. More clear is the desire to own precious metals, and their related equities.

Although the move into gold has its usual measured pace, the evidence of a growing gold boom is very much there. The senior producers are signaling it with take-over activity, and the juniors are showing it with an unquestionable zip in their markets. The same holds for silver which has now all but made up the declines since its pre Crunch run in February ’08. Silver will soon toy with breaking through the ‘08 high while gold continues to butt against its all time price high from this past June. The yellow metal is increasingly news worthy on a number of fronts.

Even though we don’t get the direct benefits we had with its move on Virginia, we none the less think we owe Goldcorp some beers for its Andean Resources (AND-T) bid. G laid out an eye popping +$3.5 billion bid for Andean to overcome a $3 billion bid from Eldorado Gold (ELD-T) that had looked like a show stopper to us. There is head scratching over the seemingly high cost of what is on the table, but this meal has multiple courses.

Despite being at opposite ends of the western hemisphere, the bids for Virginia and for Andean tie together at the level of being about the potential of a mineralized system rather than about currently defined ounces. In fact Virginia didn't have any defined ounces (at least not in the official NI43-101 sense) at Eleanor when Goldcorp made its move. Some considered that bid crazy at the time, but now, with over 9 million gold oz defined to date; it is coming in at less than $50 per oz. That looks good even using the sub $400/oz gold price at the time the bid was made. It is much lower than the cost to find new ounces now even after factoring in Goldcorp’s project work.

Goldcorp obviously feels it can outline many more than the current +3 million gold & 60 million silver oz that Andean has already outlined at its Cerro Negro project in southern Argentina. The move also puts Goldcorp into one of the sector’s strong new discovery districts. That notion brought volume into Minera Andes (MAI-T) and Mirasol (MRZ-V) which both have ground near AND in addition to their own focus holdings.

This came after a much larger bid by Kinross (K-T; KGC-N) for Red Back Mining (RBI-T) which produces and explorers for the yellow metal in West Africa. Here again the bid valuation was much larger than would justified by the existing resource base. The target is ongoing exploration at the Tasiast project in Mauritania that some subscribers may recall as a Eurozinc Mining holding before Lundin acquired it.

The Underworld Resources takeover earlier this year was similarly about mid tier producer Kinross Gold (K-T) wanting in on an exploration play and not simply an existing resource base.

In that case K did have a leg up with an existing low cost equity position in UW. That was important more because it ensured it was focused on what Underworld was doing rather than because it reduced the acquisition cost. It too expects, or at least hopes, to show a low per oz acquisition cost in the new White Gold district once it turns the exploration drills off.

There are rumors that the likes of Barrick Gold are sniffing around the Yukon. Nice to hear, but actually we would be more surprised if they weren’t. Companies the size of Barrick employ more people just to look over projects for potential acquisition than most juniors employ in total. The scale potential being put on the table there is large, and the deposit types can offer up low costs even in a relatively high cost environment like the Yukon.

While neither Coffee nor Rau are entirely new concepts for the Yukon, it’s fair to say they haven't been seen there before with this much scale potential gathered into packages. How much more work and time is needed to sufficiently outline their true scale is now the question. Both companies have undergone some consolidation after strong price runs. This is to be expected as we approach the autumn solstice, but that doesn’t mean these two, or others working in the north, are going to sleep.

As outlined further in the updates we consider the work at 3Ace by Northern Tiger to be a third discovery area and deposit type for this play. While the scale potential is still in question at 3Ace its worth noting the project is on a gravel highway that will now be maintained for the CanTung mine some 40 km distant that is being readied for new output. This is a big leg up in the potential for a smaller high-grade situation to do well. It also adds to the Yukon as a region that is “in play”.

We do view the Yukon as being a gold based “Area Play”. That is as much market concept as anything else, and we will continue speaking to it more fully over the next while. The important point is that new discoveries have prompted a large number of companies to acquire ground for which interest and funding are readily available. This is generating excitement that supports markets for the lead players and makes markets for others. However, we have entered a new information age since diamonds in the NWT and nickel in Labrador generated their Area Plays.

Drill rigs have been fairly easy to come by, but assay labs are getting backlogged again. That means relevant results will be coming in from Yukon projects through the balance of the year, and perhaps longer. How much potential will be put on the table by then is still an open question. Because of regional scale approaches to the work we don't expect anyone to be as far along with conceptual mine planning as Underworld was early this year.

Volatility is to be expected, and days like KAM just had when decent results are tossed off because they are less strong than the last release will be repeated. That too is part of an Area Play. However, there is a lot of reporting to come from both the established players and a number who have just started drill programs. That should maintain interest as gold’s price breaks new ground.

It’s a secular bull market for metals and resources. We’ve been saying that for nine years. And we’ve been right. Another thing we’ve been right about is the growing importance of the Yukon as an exploration destination and, more recently, Area Play. HRA was there early and continues to follow several of the biggest winners in the play and is tracking dozens of others for potential inclusion in HRA.

CLICK HERE to access your FREE Yukon Report from HRA now! HRA initiated coverage on 15 companies since early 2009 – the average gain to Sept. 3, 2010 is 257%!

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